The UK and the failure of Keynesian economics

The UK is ground zero for testing Keynesian economics. Guess what? It's not working. 

The very birthplace of John Maynard Keynes, the United Kingdom, has become a petri dish in which to test his every economic prescription in a time of financial crisis. With a large and growing budget deficit, a declining pound, and accelerating inflation, the UK has been scrambling for a cure. And, for the most part, as in the US and elsewhere, the nation’s leadership has been looking to Keynes’ theories for guidance.

From a Bloomberg commentary by Matthew Lynn:

“Britain has been following the mainstream prescriptions of [Keynes'] followers more than any developed nation. It has cut interest rates, pumped up government spending, printed money like crazy, and nationalized almost half the banking industry.

“Short of digging Karl Marx out of his London grave, and putting him in charge, it is hard to see how the state could get more involved in the economy.

“The results will be dire. The economy is flat on its back, unemployment is rising, the pound is sinking, and the bond markets are bracketing the country with Greece and Portugal in the category marked ‘bankruptcy imminent.’ At some point soon, even the most loyal disciples of Keynes will have to admit defeat, and accept that a radical change of direction is needed.”

Is that necessarily true? Keynesians have a tendency to refer back to the standby answer that if the remedy didn’t work, then it should have been tried earlier, or faster, or with more vigor. Lynn has an appropriate response for that:

“The Keynesian consensus is that things would have been far worse without the stimulus provided by government. And if the economy isn’t pumped up with inflated demand, it will collapse back into recession. If it’s not working, that just proves the stimulus should be even larger.

“It is the argument quacks always push: If the medicine isn’t working, increase the dosage.

“And yet, reality has to intrude into this debate at some point. The deficit can’t get much bigger, interest rates can’t be cut much lower, and sterling can’t lose much more value.”

“Stimulating the economy isn’t working.”

Indeed. Given the sheer quantity of money pumped into the economy via stimulus and bailouts you would expect to see the UK having a much better recovery, even if it were still false and temporary like the current run-up in the US. It’s painful to consider the next leg down in the UK. The few brief signs of recovery to date have been frail, and have little potential to offer more than a brittle defense against the next downturn.

For more insight, read Matthew Lynn’s full commentary in his Bloomberg piece on how the deathbed of Keynesian economics will be in the UK.

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